LendInvest, the first peer-to-peer mortgage lender, has officially launched. We get some answers about the business from Christian Faes, co-founder and director.
To read the full piece on LendInvest, see LendInvest: the first peer-to-peer mortgage lender
I asked Faes to fill in some of the most important information gaps on the LendInvest website:
Of the loans so far, how much of that came through borrowers going through Montello Capital Partners? How many individual loans does this entail so far?
We're not releasing detailed data on the deals that we have completed through the LendInvest platform just yet. I can however confirm that we have now surpassed £3.5 million, and this has been over a decent spread of different transactions, and over both residential and commercial properties.
The loans so far have been introduced to the platform through various relationships that we have in the market. The association with Montello has been extremely useful, as Montello receives between £50 million to £100 million of loan enquiries each month, which provides a huge volume of deal flow for us to select for the LendInvest platform.
On your website, you specify three types of investment. Of the "unregulated mortgage contracts that have been originated by a lender", what sorts of loans in this category do you expect will be the majority of the business? Of the second type,"new loan applications put forward by prospective borrowers", do you accept any (or expect/hope for many) applications from ordinary BTL investors?
At the moment, the majority of the deals that we have funded, have been loans that have been originated by an existing lender. That is, they have been secondary loans.
We are letting the platform evolve, and hopefully over time the deals with be fairly evenly split amongst new loans being originated through the platform, and loans that are being traded as a secondary market.
Just to clarify, if any person or business is looking to remortgage from their existing lender, they can do so through you?
A borrower can look to refinance through the LendInvest platform. However, we are carefully vetting the loans that are placed on the site. There would need to be a good reason as to why the borrower was refinancing, but this is definitely something that is possible.
Also, it is important to mention that LendInvest is only involved with unregulated mortgage contracts, i.e. it is only buy-to-let loans, and no home loans.
LendInvest seems to offer loans lasting months to a few years, but not decades. The loans seem to be longer than the average bridging loan but far shorter than typical mortgages. How exactly would you classify these loans? What has been the most common reason for a borrower taking out a LendInvest loan so far, and what do you envisage the most common reasons will be in the long run?
This is an interesting question.
Our current view is that for new bridging-loan transactions, these are unlikely to be originated through the LendInvest platform. Bridging finance requires a very quick completion turnaround, and co-ordinating various investors into a bridging loan is likely to be a bit too slow for the borrower. This is our thought on this at the moment, and its likely that the majority of LendInvest bridging loans will be secondary traded loans.
However, for longer-term loans, we think that there is a huge potential for newly originated transactions direct to borrowers. You are correct in that, at the current time, we are thinking that bridging loans will be secondary-traded loans, and then there will be one- to five-year loans that will be new originations.
By “new originations”, Faes means the loans will not be traded on LendInvest but will be brand new through the platform.
Are the loans interest-only until the end of the term?
It depends. For secondary loans, it depends on the loan terms that have been struck between the lender and the borrower; and for new loans, it will depend on what the borrower is looking for and what is commercial.
Having said this, our expectation is that longer term loans will be on a monthly interest basis, and likely interest only.
As far as you are aware, can you invest in LendInvest through a SIPP yet, as with a small number of other P2P services [such as Mayfair Bridging]?
At the current time we do not have any SIPPs that have access to LendInvest. Having said this, this would only be relevant for commercial property transactions, and at the end of the day there is not necessarily sufficient liquidity for a SIPP.
We know that some of the other P2P platforms are looking at SIPP money, but I think that this probably because they are struggling for investors.
What are the costs for investors?
Generally speaking, the costs for investors are a spread of the interest rate. That is, LendInvest charges a margin of the gross interest rate that is payable to the investor. For short term/bridging loans, the LendInvest margin is 20%; for longer term loans, the LendInvest margin is 10%.
So if the interest rate is 2% per month (not per year!) for a short-term loan, you'd get 20% less, which is 1.6%. For longer loans of, say, 8% per year, you'd get 7.2%. That's before bad debts.
What are the costs that you take from borrowers (i.e. on top of the interest that investors charge)?
For newly originated loans, we charge an arrangement fee of 2%; and this is split with the mortgage broker or introducer if the transaction has been introduced to the platform through an intermediary.
How do investors get their money? And when do they get their capital back? How are they paid - into what account?
LendInvest does not hold client money at any time. All transactions, and funds, are paid through solicitor client accounts, which are held in the name of the relevant investor at all times (until the drawdown is provided to the borrower). Monthly interest payments can be made direct to the investor, or to the investor's nominated account.
Can borrowers pay off their loans early and at what cost?
Again, this will depend on the relevant transaction, and whether it is a newly originated loan or a secondary trade. For the loans that have traded on the platform to date, there has been a minimum loan period of three months. However these have largely been bridging loans.
How can investors trade out of a loan and what does it cost? If investors can exchange loans, do new investors have to buy the loans for the same price or can they offer more/less capital? (Or can the investor who is selling offer to sell at a premium/discount?)
There is the ability for investors to trade out of loans. It will be up to the market to determine whether the investor can trade out of the loan at a premium or a discount.
Is there a way for investors to automatically reinvest interest received once £50,000 has been accumulated?
No, we do not have a function for this to be done automatically yet.
Your press release mentions “sophisticated fraud detection and underwriting processes” [which LendInvest use to check the risk of loans before accepting them]. Please could you briefly list those processes, and explain what information you require from borrowers? Could you explain why you consider your processes to be "some of the most sophisticated" on the market? What makes them better than your competitors?
This is something that could require a very comprehensive answer, and no doubt could be the subject of various articles. I would be happy to meet with you to run you through some of these, but wouldn't be prepared to give all of our intellectual property away on this issue. This is a significant advantage for LendInvest in this space. Montello has been lending for almost 5 years, and we have developed extensive fraud detection and underwriting processes which LendInvest loans have the benefit of.
Fraud in the mortgage market is a major issue. This includes general internal processes and procedures, certain insurance policies that we have in place to cover investors, title insurances etc, through to fraud-detection systems that we have access to (such as SIRA, as an example, which the main financial institutions in the UK have access to).
Investors should note that probably every firm that underwrites loans believes they have better than average processes, just as most car drivers think they're better than average!
Where are investors' funds held while they are not invested? In a segregated client account? In which bank?
The platform doesn't work in this way. No funds are invested until an investor has found a loan that they are interested in investing in. Once they are comfortable with their due diligence then funds are transferred to the solicitor's account to complete the transaction. LendInvest is not a fund, it is done on a deal-by-deal basis.
Do investors get a say in how you'll deal with companies in default?
There is a say, to a degree. Our standard practice is that we manage the default (and if necessary enforcement process). This is again something that we have experience and expertise in how to deal with, so we provide investors with the comfort that this will be dealt with in an efficient way.
I presume investors bear the full risks of loss on bad debts (i.e. there's no bad-debt provision fund)?
There is no bad-debt provision fund. As a P2P platform that is lending against the security of residential or commercial property, there is significant protection/security for the LendInvest transactions. We see that some other P2P platforms have a bad-debt provision fund, but we would suggest that their experience with bad debts is significantly higher than what LendInvest loans would be.
Zopa and RateSetter, the two largest peer-to-peer lenders with bad-debt provision funds, both have very low bad debts.
What Faes didn't say was that it would probably be inappropriate for LendInvest to have a bad-debt fund, since investors choose the specific mortgages they want to invest in for themselves. If there was a bad-debt fund, investors would all choose the high-risk, high interest loans and rely on the bad-debt fund to bail them out when things go wrong.